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Soliciting business

On September 28, 2000, Money Marketing&#39s Experts column was an article on how, after N2 day, it was going to be difficult, if not impossible, for IFAs to share commission with other professionals – in the main solicitors and accountants – for referring clients to them for the purposes of financial services business.

It referred to section 327(3) of the Financial Services and Markets Act 2000 and the part quoted is repeated below as it is very important and will have to be adhered to once it is in force from N2 day, effectively start of play on December 1, 2001.

Section 327(3) states that a person “must not receive from a person other than his client any pecuniary reward or other advantage, for which he does not account to his client, arising out of his carrying on of any of the activities”.

The earlier article, entitled “IFAs forced to review how they solicit business”, then gave a view on what unauthorised law firms could or could not do to offend the law.

It then suggested that the Treasury was effectively saying that the fees/commissions for all such “introducers” received actually belong to the client. This is where this type of introducer undertakes certain limited types of regulated activity which are incidental to their normal professional work.

What has happened in the meantime is that further details and guidance have been received mainly from the FSA on its view as to what the words “account to his client” actually mean. There have been two FSA policy statements and a handbook. These two extracts are directly to the point:

“the FSA considers this to mean that an exempt professional firm must hold to the order of its client any such reward or other advantage that it receives”.

“the FSA considers that &#39to account&#39 means that the firm must treat any comm-ission or other third-party benefit received for regulated activity as held to the order of the client.”

The words “professional firm” and “firm” in this context refer to the introducer (again, in the main, solicitors or accountants). So this leaves us with another conundrum, what does “hold (held) to the order of its (the) client…” mean?

Our interpretation is that it means that any commission must be paid to the client unless the client has expressly waived any right to the payment. On any common-sense approach, this waiver must be in writing from the client to the “introducer” and must be held on that introducer&#39s file.

Up until N2 day, the Law Society&#39s existing permission holds for solicitors – introducer firms can retain up to £20 of commissions received without having to account to the client.

It is thought that from N2 day, this will no longer be possible and all amounts must be dealt with as described above.

There is a rather strange situation brewing which seems to indicate that if an introduction only is made by a professional firm to an IFA, then there are no regulatory consequences and it may be that any payment for the introduction can be kept by the introducer.

It would appear that the “introducer” of this type must have no involvement in the specific investment and no ongoing role in relation to it.

Any continuation of existing professional firms&#39 rules will have to be considered and it may actually prove quite difficult to come into this category.

It seems to create the odd situation where it is not possible to receive certain remuneration without the client&#39s consent where some work has been done but it is possible when there has been no involvement.

This article is only guidance and should not be taken as definitive. IFAs should advise their introducer firms to refer the position to their own relevant professional body for clarification.

These professional bodies may eventually give blanket guidance and advice to their members as to their actual view on introducer fees/shared commission.

In the meantime, it is suggested that IFAs and their professional connections/introducers tread very carefully around this difficult area of the law. The FSA guidance does, however, give some hope that the law does not have to be interpreted quite as strictly as suggested in my original article as referred to above.


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